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Mini Contracts

The NSE & the BSE have launched smaller sized contracts that will allow smaller retail investors to trade in the derivatives segment. But investors should tread carefully before they take the plunge

The one that has been out of the reach of the small retail investor has been the derivatives segment. This segment has always been a place for the big ticket size investors who look to multiply their wealth by paying just marginally for their purchases. This is an extremely high-risk segment, especially in the futures section where the profits and losses can be limitless. This has been due to the big lot size involved and the high margin money required to be paid up front. And as a result, a majority of the trading done on the bourses everyday is in the derivatives segment, whereas the cash segment gets a minuscule share.

To change this scenario and increase participation of retail investors, the Securities and Exchange Board of India (SEBI) has allowed smaller sized contracts to be introduced. Subsequently, the National Stock Exchange (NSE) launched the mini-Nifty contract and the Bombay Stock Exchange (BSE) launched the 'Chhota Sensex'. As the name suggests, these are small lot size contracts with a lot size of five (Chhota Sensex) and 20 (mini-Nifty).

These new contracts will give the smaller retail participants an option to enter the derivative segment with lesser money. These contracts would involve lower trading costs and lower capital outlay (for margin). Investors would also benefit from better and precise hedging, flexible trading options and more arbitrage opportunities.

The security symbol for the smaller Sensex contracts is MSX and for the mini-Nifty contract is MINIFTY. The contracts would be available for monthly and weekly options just like existing future and option (F&O) contracts. SEBI has allowed trading in these contracts with effect from January 1, 2008. The value of a contract for a Nifty with lot size 50 is around Rs 2.5 Lakh. Hence the margin involved is also high. However, in the mini-Nifty contract, the lot size is 20 and the value of one contract will be around Rs 1.2 lakh. Likewise, the margin for a contract on Sensex was around 45,000 when the lot size is 25. For mini-Sensex the lot size is only 5 and the margin will be around Rs 9,000.

To make this a further attractive trading option, the NSE has even waived the transaction charges on all of its mini-Nifty contracts till March 31, 2008. This move was specifically targeted as the turnover on the smaller Sensex contracts was noticed to be higher than that on mini-Nifty in the initial days. This was surprising as generally the turnover on NSE F&O segment is much more than BSE. But before retail investors take the plunge and start experimenting, they should be aware that the derivatives segment can prove to be extremely risky. Futures and option require proper knowledge, guidance and a high risk appetite.